Osborne’s climbdown on pension tax relief was ‘missed opportunity’

George Osborne’s decision to back down from making radical changes to pensions tax relief was a “missed opportunity” to boost the retirement pot of the average British worker by more than 14%, according to an analysis by the Resolution Foundation thinktank.

The chancellor’s allies took the unusual step last week of announcing, less than a fortnight before the budget, that he had abandoned plans for a shakeup of tax relief on pensions contributions that could have seen all employees paying a flat rate.

At present, pensions contributions are made from pre-tax income. That means higher earners benefit more from the system, because they receive tax relief at 40%, rather than the 20% for lower earners.

The Resolution Foundation’s research shows that shifting to a 30% flat rate instead could have boosted the pension pot of the median earner by £11,200, or 13%, while a full-time employee on the national living wage would have been £3,200, or 14%, better off.

It also found that the current system, which costs £35bn a year, is “highly regressive”, with the top 1% of taxpayers receiving 13% of all pensions tax relief – the same as the entire bottom half of taxpayers.

Osborne abandoned the policy in the face of pressure from backbenchers concerned about the impact on higher earners and the risks of upheaval in the pensions industry. A higher earner, on a salary of £60,000, could have lost up to £22,000 of their retirement pot if the changes had gone ahead, according to the thinktank’s calculations.

The Lib Dem leader, Tim Farron, said: “For all his talk of being a great reformer, George Osborne only ever wanted to change our pensions system if he could use it to claw back money into the Treasury. When he realised he could only benefit the Treasury by raiding the pensions of higher earners he simply gave up. He never had any interest in making our pensions system fairer for ordinary people.”

Downing Street was known to be concerned about the risks of picking a fight with testy Conservative backbenchers at a time when the government is keen to focus the public’s attention on the benefits of remaining in the European Union.

The chancellor will deliver his budget next Wednesday, against the backdrop of a deteriorating economic outlook. He is already signalled that he may announce fresh spending cuts to meet his target of achieving a surplus on the public finances by 2020.

Adam Corlett, an economic analyst at the Resolution Foundation, said: “The current political climate may have postponed the chancellor’s plans to overhaul pension saving. But with the reforms having the potential to significantly improve the retirement prospects of the majority of workers, it’s an issue that he should return to.”